Ethiopia Agribusiness Report Q1 2013

Unlike other parts of North Africa, Ethiopia saw some mild declines in grain output in 2011/12, largely on the back of delayed rains. The country’s staple corn crop was particularly affected.

Although this will put food security back in the spotlight, we see potential for production improvements in 2012/13. This, combined with our view for grain prices to moderate in the coming months, leads us to expect food security concerns to soften somewhat. Elsewhere, we believe the sugar sector shows potential for growth, largely a function of private investment over the coming years. Finally, we expect to see only small growth in production for the country’s coffee sector, as lower average prices discourage farmers from maximising production. We believe the country will remain a key target for land acquisitions in the coming years as Gulf countries look to purchase land to ease their own food security concerns.

Key Views:

- Corn production growth in 2012/13: 11.0% to 4.9mn tonnes. This will largely be due to high prices during the planting season.

- Coffee consumption growth to 2017: 9.3% to 2.0mn tonnes. Economic grains will improve
consumption, although Ethiopians already have high per capita consumption rates compared with neighbouring Kenya and Uganda.

- Sugar production growth to 2016/17: 68.6% to 590,000 tonnes. This is mainly due to public investment by the state-run sugar corporation, which is likely to lead to a significant increase in area dedicated to sugar production. The aim of the plan is to make Ethiopia one of the world’s top 10 largest sugar exporters.

- 2013 real GDP growth: 7.2% (down from 7.8% in 2012; predicted to average 6.4% from 2012 until 2017).

A significant amount of foreign private investment in Ethiopia’s sugar industry could support production growth in the long term. The government has earmarked 4mn hectares (ha) of land for firms seeking to invest in agriculture, including those in the sugar industry, mostly in remote and sparsely populated regions in the west of the country. Owing to the low price of land, 32 companies have already acquired farming land in Ethiopia. Foreign companies leasing or buying farming land in Ethiopia will certainly increase the area dedicated to sugar cane in the country. For example, Indian company Karuturi Global plans to plant 15,000ha of sugar cane by 2012/13 and expects to produce 200,000 tonnes of sugar by 2013/14. This sugar output will be exported to Kenya and South Sudan, according to the company.

We believe the plan by Saudi investment firm Saudi Star to lease and cultivate land in Ethiopia will remain mostly on track despite a few recent setbacks. The plan, which would eventually involve production of up to 1mn tonnes of rice, has been several years in the making and would result in the company sending some rice back to Saudi Arabia. Despite several problems in recent months and a bout of public criticism, key investors have continued to support the project. We believe that barring any significant setbacks, the project will be on line sometime in 2013. Overall, we believe that the project will continue despite the setbacks. The key risk at this point is that the initial plan of rice cultivation on 500,000ha could be rolled back if Saudi Star believes the investment is not worth the cost. Ultimately,even if the project is successful, Ethiopia will remain a small producer on world markets. Furthermore,Saudi Arabia would still require rice imports given that consumption was around 1.1mn tonnes in 2011.

In 2012/13, we forecast coffee production to grow by only 2.0% y-o-y to 6.6mn bags as lower prices provide less incentive for farmers to invest in production. However, higher production, combined with higher stocks from lower-than-expected 2011/12 exports, are likely to depress local prices and support domestic consumption. The country’s domestic demand is traditionally resilient, as coffee shops tend to mix coffee with barley, or open roadside stalls and stop charging VAT in order to prevent consumption dropping when local prices rise. We see these distortions in coffee consumption disappearing in 2012/13,and expect production growth to help to sustain exports, even though we forecast global demand growth to remain subdued in 2012/13.
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